The Income Statement
The Income Statement is a formal financial statement that summarizes a company's operations (revenues and expenses) for a specific period of time usually a month or year. This statement is also called a Profit and Loss Statement or an Operating Statement.
A fiscal year is the period used for calculating annual (yearly) financial statements. While a large number of businesses use the calendar year (January-December) as their fiscal year, a business can elect to use any other twelve month period such as June-May as their fiscal year.
The categories and formats of the Income Statement also follow the rules known as Generally Accepted Accounting Principles (GAAP) and contains specific revenue and expense categories.
The following types of accounts are used to prepare the Income Statement.
The major sections of an income statement are the heading, the revenue section, the expense section, and the final calculation of a profit or loss. The heading should contain the name of the company, the title of the statement, and the period covered by the statement.
An Income Statement is just a formal summary of "Mom Capital's "Kids" Revenue and Expense.
Our Income Statement or what is sometimes also referred to as a Profit and Loss Statement was prepared for a service type of business. Businesses that are retailers, wholesalers, or manufacturers that sell products have a special section included in their income statement called Cost Of Goods Sold. This section computes the Cost Of The Goods Sold that were either purchased and sold or manufactured and sold. In retailing and wholesaling, computing the cost of goods sold during the accounting period involves beginning and ending inventories. In manufacturing it involves finished-goods inventories, raw materials inventories and goods-in-process inventories.
The elements of the report profit / loss is usually composed of
• Revenue from sales xxx
o Less Cost of sales (xxx)
• Profit / loss dirty xxx
o Reduced operating costs (xxx)
• Profit / loss surgery xxx
o Plus or minus income / other expenses xxx (+/-)
• Profit / loss before tax xxx
o Reduced tax costs (xxx)
• Profit / loss net xxx
Income Statement Example
The income statement reports a company's income or loss for a specific period. It lists revenues and subtracts from them the period's expenses. A positive balance results in an income and a negative balance indicates a loss. In the example below revenues of $6,000 minus expenses of $3,000 results in a net income of $3,000. This figure is used on the Statement of Owner's Equity.
Your Business Name
For Month Ended June 30, 2010
Net sales $5,000.00
Rental revenue 1,000.00
Total revenues $6,000.00
Wages expense $1,500.00
Cost of goods sold 1,000.00
Utilities expense 250.00
Supplies expense 250.00
Total operating expenses 3,000.00
Net income/loss $3,000.00
There are two formats commonly used to prepare income statements - the single-step and multiple-step. The example above is a single-step income statement. It consists of just two sections: revenues and expenses. Expenses are deducted from revenues in a single-step to find net income or loss.
In a multiple-step income statement, the results of transactions are shown in sections separating operating activities from non-operating activities. In addition, it classifies expenses by function. For example, selling expenses are shown separate from administrative expenses. If the company experienced extraordinary items or discontinued a segment of operations, they are also shown in different sections.
The Capital Statement
The next financial statement, the capital statement, is prepared to report all the changes in owner's equity that occurred over a period of time usually a month or year. The major sections of the statement are the heading, the owner's capital balance at the beginning of the period, the increases and decreases during the period , and the calculated ending balance.
What do you think affects Owner's Equity ? Of course revenue, expense, and draws and any capital contributed to the business by the owner. We learned earlier that the activities of the revenue and expense are summarized in the Income Statement. This net income or loss is presented on a line in the Capital Statement. All the owner withdraws (kid draws) is also presented on a line in the statement.
The capital statement serves as the bridge between the income statement and balance sheet. It uses the net income/loss from the income statement in addition to the owner's investments and withdrawal to determine the Owner's Capital balance shown on the balance sheet.
Let's illustrate this statement with a simple equation.
Ending Owner's Equity = Beginning Equity + Additional Capital Contributed + Profit or - Loss - Draws
How The Balance Sheet, Income Statement, and Capital Statement Are Related.
If you compare the owner's equity (owner's claim to assets) for two year end balance sheets, the difference (increase or decrease) is explained by the Income Statement and Capital Statement. Remember, revenues increase equity; capital contributed to the business increases equity; expenses decrease equity; and owner's draws decrease equity.